Oil platform off Angolan coast: Surging oil production made Angola Africa’s largest oil exporter in 2008 (photo: Martin Bureau/AFP/Getty Images)
GLOBAL ECONOMIC CRISIS
The loan is the largest IMF financing package to date for a sub-Saharan African country during the current global crisis. IMF support is being provided under a 27-month Stand-By Arrangement to support orderly policy adjustments that aim to restore macroeconomic balances and rebuild international reserves. While the immediate goal is to mitigate the repercussions of the adverse terms of trade shocks, the program also includes a focused reform agenda aimed at medium-term structural issues on which long-term non-oil sector growth will ultimately depend.
Angola has experienced a sustained economic boom since the end of the civil war in 2002 as buoyant oil exports, along with the benefits of peace, provided the basis for double-digit GDP growth. Surging oil production made Angola the largest oil exporter in Africa last year, and it is also the world’s fourth largest producer of diamonds. But government spending rose rapidly in line with oil revenues, while credit growth averaged 70 percent during recent years. As a result, Angola was poorly positioned when oil prices plunged in early 2009.
Nature of shock
The global economic crisis has severely affected Angola’s economy. With the sharp drop in oil prices and export revenues (see Chart 1) the economy has slowed sharply, while fiscal and external positions have turned from large surpluses to deficits. As a result, usable reserves fell by one-third to only 2¾ months of imports through June 2009, partly reflecting the National Bank of Angola’s (BNA) efforts to stabilize the exchange rate and the government’s drawdown of its foreign currency deposits at the BNA as deficit financing became difficult.
In response to mounting macroeconomic imbalances, the government tightened both fiscal and monetary policies, with recourse to foreign exchange rationing to stem the reserve loss. However, the piecemeal response did not restore market confidence in economic policies, as reflected in the large and widening spread between the official and parallel exchange rates and further pressure on reserves through September 2009 (see Chart 2).
Key pillars of adjustment
The adjustment program is based on three key pillars, with a determined fiscal adjustment playing the leading role. The fiscal program for 2010 envisages an ambitious reduction of the non-oil primary fiscal deficit, mainly achieved by expenditure restraint.
Structural reforms
• Fiscal transparency. The government will publish quarterly budget execution reports and ensure greater transparency and better oversight of major state-owned enterprises (SOEs), especially Sonangol, the state-owned oil company. The latter includes the reporting on a quarterly basis by major SOEs to the government of their quasi-fiscal operations and investment activities and the publication of these reports. A full audit of Sonangol’s accounts for 2008 was completed by Ernst & Young in mid-November 2009. The government is committed to publishing Sonangol’s audited financial statements and gradually phasing out its quasi-fiscal operations.
• Sovereign wealth fund (SWF). To develop an institutional framework that de-links the fiscal stance from volatile short-term oil revenues and to avoid future boom-bust cycles, the authorities are developing a plan to set up a SWF/oil fund along the lines of the Norwegian oil fund.
• Tax system. The authorities have developed a tax reform strategy to move toward a consumption-based tax system; it also envisages substantial simplification of the tax system to improve efficiency and reduce evasion. The strategy includes setting up an autonomous revenue authority and strengthening tax administration including by streamlining overly generous tax exemptions so as to boost non-oil revenues.
The fall in outlays reflects a significant decline in current spending on goods and services while maintaining resources for necessary social spending and the capital budget, mainly targeting infrastructure development. The program also emphasizes strengthening public financial management and enhancing fiscal transparency, especially in the oil sector (see box).
The second pillar is an orderly exchange rate adjustment backed by tight monetary policy to normalize conditions in the foreign exchange market. The authorities resumed the foreign exchange auction system on October 2, and since then the official exchange rate has depreciated by about 10 percent, bringing it in line with the rates charged by banks. The parallel market rate has appreciated somewhat, yielding a much reduced premium over the official exchange rate.
Maintaining confidence in the financial system is the third pillar of the program. The program includes measures to strengthen the BNA’s regulatory and supervisory framework to limit risks stemming from both the economic slowdown and sizeable foreign currency lending to unhedged borrowers, as the degree of dollarization is high.
The Stand-By Arrangement will help Angola restore macroeconomic balances and mitigate repercussions of the global economic crisis during the program period. But to lay a robust foundation for non-oil sector growth over the medium term, deeper structural reforms are needed to enhance competitiveness and invigorate private sector development. To this end, continued cooperation between the Angolan government and the IMF will help build and strengthen the institutions of this resource-rich economy.
